Date of Hearing: May 18, 2020

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 2528 (

Author:Diep) – As Amended Ver:May 5, 2020

Majority vote. Fiscal committee.

SUBJECT: Sales and use taxes: income taxes: written advice

SUMMARY: Requires the California Department of Tax and Fee Administration (CDTFA) and the Franchise Tax Board (FTB) to send a letter within 30 days to confirm receipt of a taxpayer's request for written advice and provide the written advice within 180 days from the date the department receives the request. Specifically, this bill:

Requires CDTFA and the FTB board to confirm receipt of a request by a person for written advice by sending a letter within 30 days from the date of receipt of the request. FTB's chief counsel shall confirm receipt of a request for written advice of a legal ruling by sending a letter within 30 days of the date of receipt of the request for written advice.
Requires CDTFA and the FTB board to respond to a person's request for written advice within 180 days from the date the request is received. FTB's chief counsel or their designee shall provide a response within 180 days from the date the request by a person for written advice of a legal ruling is received by the chief counsel.
Provides that all adopted rules and regulations issued pursuant to Revenue and Taxation Code (R&TC) Section 7051, as they read prior to the changes made by this bill, and in effect on December 31, 2020, shall remain in effect and shall be fully enforceable unless and until modified or superseded by CDTFA.
Provides that all published guidelines that have been issued by FTB's chief counsel, as they read prior to the changes made by this bill, and in effect on December 31, 2020, shall remain in effect and shall be fully enforceable unless and until modified or superseded by FTB's board.
Makes technical changes.
Provides that the provisions of this bill apply to written requests received by CDTFA and FTB on or after January 1, 2021.

EXISTING LAW allows CDTFA and FTB to relieve a person from specified tax liability, interest and penalties if a person's failure to timely file a return or make a payment is due to reasonable reliance on the department's written advice.

FISCAL EFFECT: According to FTB, this bill would not impact state income tax revenues.

COMMENTS:

The author has provided the following statement in support of this bill:

Assembly Bill 2528 will provide greater certainty and further strengthen the Katz-Harris Taxpayers' Bill of Rights Act. [R&TC] Sections 21012 and 6596 allow taxpayers the right to request binding, written advice specific to their circumstances. Only written advice is binding from the [FTB] or the [CDTFA] as advice provided verbally, in-person, or over the phone is considered informal and non-binding.

Current statute does not specify a timeline or set a required deadline for the FTB or CDTFA to timely respond to written requests for advice from taxpayers. There have been instances where no response was provided or there was no record of written advice being requested, causing an undue hardship on taxpayers to comply with the law while acting in good faith.

This bill will require that CDTFA and FTB send an acknowledgement letter within 30 days from receiving the taxpayer's request and provide the written advice within 180 days from the date the request is received.

Supporters state that "[a]dvice provided verbally, in- person, or over the phone is considered informal and non-binding. Taxpayers can request written advice that is binding from the FTB and CDTFA. Taxpayers are relieved of taxes, penalties, and interest even if the advice is erroneous as long as taxpayers follow the written advice received. This bill requires the FTB and CDTFA to send an acknowledgement letter within 30 days from receiving the taxpayer's request and provide the written advice within 180 days from the date the request is received. Current statute does not specify a timeline or a required deadline for the FTB or CDTFA to timely respond to written requests for advice from taxpayers." Supporters further state that "[t]he majority of small business owners do not have accountants and lawyers on staff to handle tax issues. Many tax questions are complicated and reliance on timely and accurate answers from the state is imperative, especially if inaccurate information causes a business owner to owe penalties and interest."
Committee Staff Comments:
1. Reliance on CDTFA's written advice: R&TC Section 6596 allows CDTFA, under specified circumstances, to relieve a person from sales and use tax, interest and penalties if the person's failure to timely file a return or make a payment is due to reasonable reliance on CDTFA's written advice. To qualify for the relief, a person must satisfy all of the following conditions:
  1. The person must have requested advice regarding how tax applies to a particular activity or transaction in writing by fully describing the facts;
  2. CDTFA must have responded in writing to the person advising whether the described activity or transaction is subject to tax or stating the conditions under which the activity or transaction is subject to tax; and,
  3. In reasonable reliance on CDTFA's advice, the person did not charge or collect sales or use tax for the described activity or transaction, or pay use tax on the storage, use, or other consumption in this state of tangible personal property.

The reliance on the written advice must have also occurred prior to either CDTFA rescinding or modifying the advice by written notice, or a change in law, a change in CDTFA's regulations, or a final decision of a court, which renders the agency's earlier written advice invalid. Assuming these things did not occur prior to relying on the written advice, a person seeking relief must provide a copy of the written request sent to CDTFA, a copy of CDTFA's written advice, a statement under penalty of perjury setting forth the facts to support the claim, and any other information that CDTFA may require.

1. Reliance on FTB's written advice: R&TC Section 21012 provides that a taxpayer that failed to remit the income or franchise tax otherwise due may be relieved of the tax, interest, penalties, or additions to tax when the taxpayer has requested, received, and reasonably relied upon the FTB's written advice as to whether a particular activity or transaction is subject to tax. Taxes shall only be relieved if the person's failure to make a timely return or payment was due to a person's reasonable reliance on the written advice of a legal ruling by the chief counsel, and only if the board itself finds all the conditions satisfied. Additionally, a person must satisfy all of the following conditions to qualify for relief:
  1. The person requested in writing that the board advise them whether a particular activity or transaction is subject to tax under the tax laws administered by that agency, and the specific facts and circumstances of the activity or transaction were fully described in the request;
  2. FTB responded in writing to the person regarding the written request for advice, stating whether or not the described activity or transaction is subject to tax, or stating the conditions under which the activity or transaction is subject to tax; and,
  3. In reasonable reliance on FTB's written advice, the person did not remit the tax due.

Relief will not be granted if the liability for taxes applied to a particular activity or transaction which occurred after FTB rescinded or modified the advice so given. Relief will also not be granted if the tax consequence expressed in FTB's written advice was subsequently changed by a change in statutory law or case law, a change in federal interpretation of case law, or a material change related to the taxpayer's circumstance. A person seeking relief must additionally provide a copy of the written request sent to FTB, a copy of FTB's written advice, a statement under penalty of perjury setting forth the facts to support the claim, and any other information that FTB may require.

1. Written advice is not always produced: Both CDTFA and FTB have existing practices and procedures in place to process requests for written advice; and although they are both similar, they are not exactly the same. CDTFA's Audit Manual and Compliance Policy and Procedures Manual provide general guidelines for CDTFA staff to process a taxpayer's request for written advice, including written advice that may be relied upon by a taxpayer. FTB Notice 2009-09 provides similar guidance for FTB staff. Depending on the circumstances and information provided, not all taxpayer requests result in written advice that may be relied upon for tax relief purposes. As an example, CDTFA does not provide advice that can be relied upon if the taxpayer does not self-identify, if the question is vague, or if insufficient background information is provided. Similar situations apply to FTB. Although exact figures are not available, only a small percentage of requests actually result in written advice that may be relied upon by a taxpayer.
2. What does this bill do? The most recent amendments added language specifying that all published guidelines issued pursuant to FTB's chief counsel rulings shall remain in effect and shall be fully enforceable unless and until modified or superseded by FTB's board. As such, if a taxpayer submits a request for advice for a situation that FTB currently does not provide written advice for, FTB would continue the practice and not provide advice even if this bill were to become law. In these circumstances, it is unclear if the 30- or 180-day requirements in this bill even apply. It appears, therefore, that the only time a taxpayer would receive a notice within the 30- and 180-day deadlines is if the request for written advice falls within one of the existing circumstances that would trigger a written response that can be relied upon for tax relief. If this is not the author's intent, the author may wish to clarify that a response to the taxpayer is required even if written advice will not be forthcoming.

The most recent amendments, and this bill, do not apply in the same manner to CDTFA. CDTFA does not have published guidelines that specify that a ruling will not be issued where the tax return has already been filed or where the same issue is currently the subject of an audit, protest, appeal, or litigation. As such, if CDTFA receives a request for advice during an audit, CDTFA would be required to respond within 180 days even if the audit is extremely complicated and goes on beyond 180 days. The 180-day response time may also be impossible to meet if the taxpayer refuses to provide needed information to properly answer the taxpayer's question. As currently drafted, this bill requires the department to respond within 180 days of receiving the request, not within 180 of receiving all necessary information needed to properly answer the taxpayer's question. In general, the author may wish to amend this bill outlining specific circumstances in which CDTFA is exempt from the 30- or 180-day deadlines. Committee staff is available to work with author's office to address these concerns.

REGISTERED SUPPORT / OPPOSITION:

Support

California Taxpayers Association

Howard Jarvis Taxpayers Association

National Federation of Independent Business

Opposition

None on file

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098

AB 2528: Sales and use taxes: income taxes: written advice.

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